SBA 504 Lender Training for Region IX Presenter: Diana Storo, Financial Analyst Sacramento Loan Processing Center (504)

SBA 504 Lender Training for Region IX Agenda SBA Information Notice 5000-19004 Issuance of SOP 50 10 5(K), effective April 1, 2019 Subpart C – Section 504 Certified Development Company program Loan Processing frequent screen out and decline items Q & A

SBA 504 Lender Training for Region IX SOP 50 10 5(K) effective 4/1/19 504 loan processing Federal government employee (GS-13 or equivalent) Escrow closing Franchise review process and management agreements

SBA 504 Lender Training for Region IX SOP 50 10 5(K) effective 4/1/19 504 loan processing Federal Government employees - Prior to submission of application, a written clearance letter from SBA is needed for federal employees (GS-13 or equivalent). (page 16) Escrow closing (instead of interim financing) - When a project is to acquire an existing facility that the OC will immediately occupy, an escrow closing will be allowed instead of requiring interim financing. (page 269) (not yet available) Franchise review process – multiple agreements, management agreements. Franchise Directory must be checked for all of the applicant’s agreements that meet the FTC definition and are critical to the applicant’s business operation. If not on the Directory, the application cannot be processed. If SBA determines not eligible, loan cannot be processed. (page 279) Management agreements – affiliated with the franchisor, not eligible. (page 285)

SBA 504 Lender Training for Region IX SOP 50 10 5(K) effective 4/1/19 504 loan processing Credit Elsewhere Liquidity Residential healthcare facilities Marijuana-related businesses Hemp-related businesses

SBA 504 Lender Training for Region IX SOP 50 10 5(K) effective 4/1/19 504 loan processing Credit elsewhere and liquidity – Non-state, or non-local government sources are included. If applicant’s cash flow, collateral (including guarantees) would meet conventional credit standards, the application is not eligible. Liquidity increased from 10% to 20% ownership. (pages 285 – 286) Residential facilities that do not provide healthcare and/or medical services are not eligible. (page 288) Marijuana-related businesses (direct/indirect) eligibility determination – not eligible (page 290). Also, during the life of the loan, cannot lease space to any marijuana-related business. (page 306) Hemp-related businesses eligibility determination - eligible (page 291)

SBA 504 Lender Training for Region IX SOP 50 10 5(K) effective 4/1/19 504 loan processing Religious Eligibility Worksheet Prurient sexual nature Energy Public Policy Project

SBA 504 Lender Training for Region IX SOP 50 10 5(K) effective 4/1/19 504 loan processing Religious Eligibility Worksheet (page 292), changed to prior to submitting an application to the SLPC, must be reviewed and approved. Prurient sexual nature - changed the process to submission of documentation prior to submitting the application with a copy of SBA’s approval. (page 297) Energy Public Policy Project – increased the amount of energy generated from 10% to 15% for the Eligible Energy Public Policy Project. (pages 355 – 356)

SBA 504 Lender Training for Region IX Frequent Screen out and Decline items Financial information Credit Reports and PFS - 90 days Business interim financials - 120 days Tax Identification Numbers Affiliation and Size Standard

SBA 504 Lender Training for Region IX Frequent Screen out and Decline items Financial information Credit reports and PFS need to be dated within 90 days from the application submission date. Business interim financials within 120 days from the application submission date. Tax Identification Numbers For all principals of the borrowing entity, operating company and affiliates. Affiliation and size standard analysis Affiliation and size standard is incomplete/incorrect Reference SOP 50 10 5 (K), pages 275 – 277. All affiliated entities have not been addressed and Tax IDs are missing. Size standard calculation is incorrect.

SBA 504 Lender Training for Region IX Frequent Screen out and Decline items Balance Sheet Pro forma balance sheet Projections

SBA 504 Lender Training for Region IX Frequent Screen out and Decline items Balance Sheet Interim Balance Sheet is required for sole proprietorship Debt schedule must reconcile to the interim balance sheet. Negative working capital needs to be addressed. A thorough analysis of the working capital needs and source(s). Pro forma balance sheet Pro forma balance sheet does not carry forward the most recent interim financial numbers. Pro foma balance sheet does not account for any opening cash balance to meet the start-up needs of the operating company. The balance sheet provided does not include the required pro forma analysis, which must include adjustments (debits and credits) to verify the project injection and all other aspects of the project, including working capital.

SBA 504 Lender Training for Region IX Frequent Screen out and Decline items Projections A minimum of 2 years’ projections including support for the assumptions, page 263, SOP 50 10 5(K). Month-by-month for the first year for a new business. Reliable assumptions with independent analysis need to accompany the projections. Projections need to include lender’s analysis detailing the assumptions and bases for the assumptions.

SBA 504 Lender Training for Region IX Frequent Screen out and Decline items Historic properties Business acquisition Limited or Special Purpose Property 504 Loan Application package

SBA 504 Lender Training for Region IX Frequent Screen out and Decline items Historic properties SOP 50 10 5 (K), page 308, project property is eligible to be included in the National Register of Historic Places (Historic Properties). Properties that are 100 years old are eligible to be listed and written approval is needed by SBA District Counsel with concurrence from HQ OGC submitted to SLPC. Business acquisition When a project involves a business acquisition, the maximum eligible project cost for the real estate purchase is limited to the lower of the as-is appraised value or the actual purchase price. The project structure is considered by SBA to be a business acquisition, as the existing business is the same type of business that is being purchased by the applicant’s business. Business acquisition projects require obtaining and analyzing the seller’s federal tax returns and the interim financials. SOP 50 10 5(K), page 344, Section E, states: “For a change in ownership, the CDC must verify the seller’s business tax returns or a sole proprietor’s Schedule C. Where there is an acquisition of a division or segment of an existing business, other forms of verification may be used in lieu of the 4506-T (e.g. Sales tax payment records).”

SBA 504 Lender Training for Region IX Frequent Screen out and Decline items Limited or Special Purpose Property The project property is special purpose per SOP 50 10 5(K), pages 270 – 271 which requires a minimum of 50% participation by the third party lender. The applicant must contribute an additional 5% borrower contribution. For any business (including affiliates) that has an outstanding debenture for a Project involving a Limited or Special Purpose Property, for each subsequent Project involving a Limited or Special Purpose Property, the Borrower must contribute at least 20%. 504 Loan Application package – is incomplete or has incorrect information. Form 1244 is incomplete including missing signatures and dates. Bank letter terms and conditions including the bank letter loan amount is less than 1244. E-Tran input incomplete/incorrect information.

Sacramento Loan Processing Center Q & A Sacramento Loan Processing Center 916-735-1214 504Questions@sba.gov